Ministers are individuals duly ordained, commissioned or licensed by a church. The term "church" is generic and does not refer to any particular religion.
Most ministers are treated as dual-status taxpayers:
- They are employees for income tax purposes;
- They are self-employed for Social Security and Medicare tax purposes.
If the minister is an employee of a church or religious organization, their compensation is typically reported to them on Form W-2. The minister may also receive self-employment income performing services such as weddings, baptisms, and funerals, and this income may or may not be reported to them on Form 1099-NEC or 1099-MISC.
Note that while ministers are not subject to their employer withholding federal income tax, they may instruct their employer to withhold tax anyway to cover any income and SE taxes.
Housing or parsonage allowance exclusion
A minister living in a church-owned parsonage can exclude from gross income for income tax purposes the fair rental value of the parsonage. However, with the exception of a retired minister, they must pay self-employment tax on the fair rental value of the parsonage (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities). These amounts are generally reported on Form W-2 in Box 14, though may be reported instead on a separate statement. When completing the clergy tax-free income worksheet, you will need to enter these amounts.
Similarly, a minister who owns or rents a home and receives a housing or rental allowance can exclude from gross income the lowest of (a) the amount actually used to provide a home; (b) the amount officially designated as a rental allowance; or (c) the fair rental value of the home, including furnishings, utilities, garage, etc. These amounts will be entered on the clergy tax-free income worksheet as well.
Return preparation overview
When completing the tax return for a member of the clergy, follow these steps:
- First, enter all Form(s) W-2.
- Next, complete Schedule C if there is any separate self-employment income.
- Finally, after all employment income is entered, complete the Clergy Tax-Free Income Worksheet under the Schedule SE menu to determine the taxable amount of the minister's income. (This is Worksheet 1 in IRS Publication 517.) This worksheet, along with Worksheets 2 and 3 in Publication 517, will inform Schedule SE.
The only exception to paying SE tax is when the minister or clergy member has filed for an exemption using Form 4361 or Form 4029, either of which must be approved by the IRS.
Completing Schedule C, if needed
If the minister's only source of ministerial income is on Form W-2, skip completing Schedule C and proceed to the next section.
Otherwise, if the minister received self-employment income officiating at events such as weddings, baptisms, funerals, etc., that income should be reported on Schedule C along with any out-of-pocket expenses related to the income.
To enter a minister's self-employment income on Schedule C in TaxSlayer ProWeb, from the Federal Section of the tax return (Form 1040):
- Select Income
- Select Schedule C - For a MFJ return, indicate if the Schedule C is for the taxpayer or the spouse.
- If the ministerial work is done under a separate name, has an employer ID number, or has a separate address, enter that information. Otherwise these fields can be left blank.
- Business Code - Enter 813000.
- Description of Business - Enter a short description or leave it blank to accept the description for business code 813000 (Religious, grantmaking, civic, professional, & similar organizations).
- Select Continue to move to the Questions menu. In the Schedule C Questions Menu, indicate as needed the accounting method (cash or accrual) and the inventory valuation method (leave as is if there is no inventory of items being sold), and check any check boxes as appropriate. In particular, be sure to check "Check here to Prorate Expenses for Minister/Clergy."
Click Continue to move to the Clergy Tax-Free Income Worksheet. (Note that this is a shortcut to the worksheet under the Schedule SE menu. Once it has been created, the Clergy Tax-Free Income Worksheet is subsequently accessed via the Schedule SE menu.)
Completing the Clergy Tax-Free Income Worksheet
The Clergy Tax-Free Income Worksheet is under the Schedule SE menu. (This is Worksheet 1 in Publication 517, "Figuring the Percentage of Tax-Free Income".) Its purpose is to help determine the minister's taxable ministerial income, their allowable deductions, and their net self-employment income.
To navigate to the Clergy Tax-Free Income Worksheet, from the Federal Section of the tax return select:
- Other Taxes
- Self-Employment Tax - If filing MFJ, indicate who the Schedule SE belongs to.
- This Schedule SE is being filed for a minister or member of the clergy - Check this box.
Under Religious and Exempt Income evaluate the three options to see if any need to be selected:
- Member of religious order and have 4029 approved by IRS - If the taxpayer has an approved Form 4029, click this button.
- Member of religious order and have 4361 approved by IRS - If the taxpayer has an approved Form 4361, click this button.
- I am a minister or a member of a religious order and I have filed Form 4361, but I have $400 or more of other net earnings from self-employment - If the taxpayer has an approved Form 4361 but has earned $400 or more in non-ministerial self-employment income, click this button.
When finished with the above, click CONTINUE to go to the Clergy Tax-Free Income Worksheet.
Complete the worksheet as follows:
- W-2 Salary as a Minister - Enter the W-2 Box 1 minister income in one of the two fields depending on whether or not Social Security tax was withheld.
- Gross Income from weddings, baptisms, writing, lecturing, etc. - Enter the gross income being reported on the ministerial Schedule C.
The parsonage is housing provided by the church to the minister, and the remaining menu lines will vary depending on whether or not you answered Yes or No to the church providing a parsonage. Worksheet 1 lines 3a to 3e are completed when the church provided a parsonage, while lines 4a to 4l are completed for a minister living in their own housing, whether rented or purchased.
If the church does not provide a parsonage, leave this box unchecked ...
Check here if Church provides you with a parsonage
... and enter the following information:
- Annual Fair Rental Value (FRV) of home, plus the cost of utilities - This amount may be equal to the amount shown on Form W-2 Box 14, otherwise the minister can obtain an appraisal from a local real estate professional.
- Annual Parsonage or Rental Allowance - Enter here any amount shown in Form W-2 Box 14 designated as a housing allowance.
- Annual Utility Allowance, if Separate - Enter here any amount shown in Form W-2 Box 14 designated as a utility allowance.
- Actual Annual Expenses for Parsonage - Enter the total actually spent on the parsonage. The list of expenses includes mortgage payments (both principal and interest), real estate taxes and special assessments, mortgage and/or title acquisition fees, home improvements and repairs, furniture moving costs, certain essential home furnishings, home insurance, landscaping and yard maintenance, rental payments for storage, etc.
- Actual Annual Expenses for Utilities - Enter here the actual utility expenses for the year. Utilities generally includes electricity, natural gas, oil, water, basic landline telephone, trash pickup service, basic cable television, and internet service.
If the church provides the minister with a parsonage, check the box ...
Check here if Church provides you with a parsonage
... and enter the following information:
- Annual Fair Rental Value (FRV) of parsonage provided by church - This amount may be shown on Form W-2 Box 14 or separate statement, but if not the minister can obtain an appraisal from a local real estate professional.
- Annual Utility Allowance, if Any - Enter here any amount shown in Form W-2 Box 14 or separate statement designated as a utility allowance, if any.
- Actual Annual Expenses for Utilities - Enter here the actual utility expenses for the year. Utilities generally includes electricity, natural gas, oil, water, the rate for basic landline telephone, trash pickup service, the rate for basic cable television, and internet service.
When finished with these entries, click Continue.
If you came to the clergy worksheet via Schedule C you'll be returned to the Schedule C edit menu where you can enter the taxpayer's ministerial self-employment income as well as the expenses incurred related to this income. The expenses will be prorated based on the percentage of tax-free income as calculated on the Clergy Tax-Free Income Worksheet.
Note: This is a guide on entering clergy information into TaxSlayer ProWeb. It is not intended as tax advice.
Additional Information:
Minister's Tax Return - Frequently Asked Questions (FAQ)
IRS: Publication 15-A - Employer's Supplemental Tax Guide
IRS: Tax Topic 417 - Earnings for Clergy